China Education:Bright future

类别:行业研究 机构:德意志银行 研究员:Tallan Zhou,Karen Tang 日期:2018-01-08

K12after-school tutoring is a secular growth sector

    We analyze the supply/demand condition of China's K12after-school tutoringmarket and conclude the sector will likely see secular growth in the next fiveyears. We believe positive demographic growth, an increased number ofwealthy families, and greater education awareness are the demand drivers.However, China's supply of top universities is still insufficient and theadmission rate remains low. This has led to surging needs for after-schooltutoring services. We forecast the K12tutoring market to see a 13-14% CAGRin 2017-22E, assuming: 1) K12students see a CAGR of 3%, 2) tutoringpenetration rate climbs 2.5% p.a.; and 3) ASP rises (like-for-like basis) 5% p.a.

    More demand for education in the long term

    China’s Gaokao (college entrance exam)-takers as a percentage of thenewborn population increased to 65% in 2016from only 25% in 2002, whilethe birth rate remained unchanged at 0.11-0.12%. However, we now seenewborns increasing from 2016, thanks to the government’s two-child policy.(1.3m more newborns in 2016). Besides the positive demographic drive, moremiddle-class families are increasing spending on K12tutoring for children. Percapita consumption on education has tripled in Beijing, Shanghai and Jiangsuin the past decade amid increased education awareness, with more familiesinvesting in education, in order for their children to get into top universities.… but the reality is: China’s supply of top universities is still insufficientAdmission rates into top universities (Project 985and 211universities) remainlow at less than 3% on average. Although students from tier 1cities such asBeijing/Shanghai/Tianjin have a higher admission rate, the rate is declining.Beijing’s admission rate to the Project 211and 985universities declined to 8%in 2016from 10.6% in 2013. The intensified competition seen in Gaokao hasresulted in strong competition from primary school entry exams to high schoolentry exams, with significant records showing students from “key schools”have a much higher possibility of being admitted into top universities.Consequently, this unbalanced supply/demand creates a huge demand forafter-school tutoring, as public school education alone is perceived asinsufficient for average K12students.

    Valuation and risks

    We initiate Buy on EDU (New Oriental) (target price USD116) and TAL (targetprice USD35). EDU and TAL are leaders in the K12tutoring market but theyonly account for less than a combined 4% market share. We expect them togrow share robustly, and believe they will penetrate into lower tier cities toincrease their total market share. Our valuation is based on DCF, because K12-tutoring is a strong cash flow business with visible and stable growth. We alsocross-check our DCF-based valuation by PEG. Risks include: 1) change ofpolicy; 2) disease outbreak; and 3) aggressive network expansion.



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